In the same vein shifting toward low carbon sources

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Unformatted text preview: – which constitutes the real problem that requires an effective solution on a global level (Harks, 2010). The recent ‘roller coaster’ of prices hitting almost US$150 per barrel in June 2008 before dipping to US$30 and subsequently rising to almost US$120 in early 2011 again vividly illustrates this point. Overall, annual price variations have increased from a band of approximately US$5 in the 1990s to almost US$100 in 2008. Such considerable price volatility is detrimental to both energy security and a low-carbon future . Oil producer countries will only invest billions of dollars into finding new resources if they can anticipate a stable and sufficient return on their investment. In the same vein, shifting toward low-carbon sources of energy requires planning security. Cumulative energy investment needs until 2035 are estimated at some US$33 trillion in a ‘N ew Policies’ scenario, the equivalent to almost 2.5 times the current US GDP (IEA, 2010, p. 77). Roughly a quarter of these investments need to go into the oil sector, mostly in upstream and mostly in non-OECD countries (IEA, 2010, pp. 139f.).11 The bulk of funds will need to come from companies, households and commercial investors. All of these desire a reliable, long -term price environment. A predictable oil price would as such play a major role in fostering both long-term energy security and climate mitigation efforts. Adding to this, both producers and consumers have another clear incentive to avoid massive price swings: as producers seek to smooth income streams and thus national budgets over longer periods of time, large price fluctuations add a high degree of uncertainty to budgetary planning and subject the national economy to significant shocks. A case in point is Russia, which had to default on its sovereign debt in 1998, largely as a consequence of a sudden and unprecedented decline in world crude prices. Similarly, consumers have an interest in oil price stability since it provides planning security and avoids price shocks that can have devastating macroeconomic consequences. 78 Oil DDW 2012 1 AT: Can’t Control Prices 79 Last printed 9/4/2009 7:00:00 PM Oil DDW 2012 1 Saudi Arabia and OPEC dominate exports and spare capacity – Causes control of oil prices Wirl, Faculty of Business, Economics and Statistics, University, 12 Franz Wirl, Faculty of Business, Economics and Statistics, University, 12, [“OPEC’s Strategies,”] E. Liu Secondly, OPEC decisions determine the oil price, because the OPEC countries or a proper subset of Saudi Arabia and other Arab Gulf countries are the marginal (residual) suppliers. The reasons are that they hold roughly 3/4 of world proven reserves (BP 2011), provide the bulk of global oil exports although their production (2010) of 33 million barrels per day (mb/d) amounts to only 40 % of world production, and own almost all spare capacity. While competitive producers produce at their capacity implying little variance in their (individual and aggregate) supply, OPEC and its core members vary...
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This note was uploaded on 01/30/2013 for the course ECON 101 taught by Professor Burke during the Spring '13 term at Southern Arkansas University.

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